FTC, et al. v. Staples, Inc., et al. · Case 1:15-cv-02115-EGS Document 369 Filed 04/11/16 Page 1 of 56 FTC, et al. v. Staples, Inc., et al. Summation April 5, 2016 1

Case 1:15-cv-02115-EGS Document 369 Filed 04/11/16 Page 1 of 56

FTC, et al. v. Staples, Inc., et al. Summation

April 5, 2016

1


• Clayton Act § 7 prohibits mergers, the effect of which "may be substantially to lessen competition, or to tend to create a monopoly"

• "[T]he government need only show that there is a reasonable probability that the challenged transaction will SUbStantially impair COmpetition" (Sysco,113 F. Supp. 3d 1, 22 {O.D.C. 2015}; Staples,970

F. Supp. 1066, 1072 {O.D.C. 1997})

- FTC 11is not required to establish that the proposed merger would in fact violate section 7 of the Clayton Act" (Heinz, 246 F.3d 7os, 714 ro.c. or. 2oo1); Staples, 970 F. Supp. at 1071)

- The standard requires an assessment of the merger's likely impact on immediate and future competition, and 11doubts are to be resolved against the transaction" (Brown Shoe, 370 U.S. 294,332-33 (1962); Elders Grain

868 F.2d 901, 906 (7th Cir. 1988) (Posner, J.) (citing Phi/a. Nat' / Bank, 374 U.S. 321, 362-63 (1963) and Falstaff Brewing Corp., 410 U.S. 526, 555-58 (1973)))

2


~- It Is Suff_i~ient to Show Simply a Reduction in .'.:_, .. ~,,:_:. / Com pet 1 t 1 on

• No requirement to show that~ competition is eliminated

See H&R Block/ merger enjoined even though #1 competitor with 62.2% market shared would have remained post-merger (833 F. supp. 2d 36,

71-72 {D.D.C. 2011})

• The merger could still be likely to substantially lessen competition even if the merged firm will still face competition from third-parties

See Heinz/ holding that elimination of competition between secondand third-largest jarred baby food manufacturers would weaken COm petition (246 F.3d at 716-17; see also FTC v. Swedish Match, 131 F. Supp. 2d 151, 169 {D. D.C. 2000};

Staples, 970 F. Supp. at 1083)

3


.... ~:~·· ..

!1~-) 13{b) Preliminary Injunction Standard Is Well-Settled ·· .. /.~.::~~:~!.\': ........

• Preliminary injunction should issue when it would be in the public interest, as determined by:

- Weighing the equities, and

- Considering the FTC's likelihood of success on the merits

• § 13(b) enacted to make preliminary relief 11broadly available to the FTC11

(Heinz, 246 F.3d at 714; Sysco, 113 F. Supp. 3d at 22)

• 11The equities will often weigh in favor of the FTC because 'the public interest in effective enforcement of the antitrust laws' was Congress's specific 'public equity consideration' in enacting Section 13(b)11

(cccHo/dings,605F.Supp.2d.

26, 35 (D.D.C. 2009}) 4


~- Private Equities Are Afforded Little Weight ··-./.~ .. \:'.~:~!.~': ........

• The risk that the transaction will not occur is a 11private equity" (Heinz, 246 F.3d at 727 n.25; Whole Foods, 548 F.3d 1028, 1041 {D.C. Cir. 2008}; CCC Holdings, 605 F. Supp. 2d at 76)

• Courts 11must afford [private equities] little weight, lest we undermine section 13{b)'s purpose of protecting the 'public-atlarge, rather than the individual private competitors"' (Heinz, 246 F.3d at 727 n.25)

• 11[T]he risk that the parties will abandon the merger rather than proceed to an administrative trial on the merits is, however, 'at best, a private equity' which cannot overcome the significant public equities weighing in favor of a preliminary injunction" (Sysco, 113 F. Supp. 3d at 87)

5


~- Burden Shifting Framework ·· .. /.~y-~~!\': ........

• Plaintiffs' initial burden of making prima facie case: Showing the merger would produce a firm controlling an undue percentage of the relevant market, and would result in significant increase in concentration (Phi/a. Nat'/ Bank,

374 U.S. 321, 363 {1963}; Heinz, 246 F.3d at 715)

Such a showing establishes a presumption that the merger violates §7 (Baker Hughes, 908 F.2d

981, 982 {D.C. Cir. 1990}; Heinz, 246 F. 3d at 715)

6


• Plaintiffs' initial burden of making prima facie case:

Showing the merger would produce a firm controlling an undue percentage of the relevant market, and would result in significant increase in concentration (Phi/a. Nat'/ Bank,

374 U.S. 321, 363 {1963}; Heinz, 246 F.3d at 715)


981, 982 {D.C. Cir. 1990}; Heinz, 246 F. 3d at 715)

• Additional evidence of harmful effects corroborates the presumption Not part of our burden

Strong evidence that harm would occur: the merger would eliminate one of two best choices in a bidding market

7


.. ··~:~··. i!riJ; Burden Shifting Framework ···./.~..!!.~~!.\'~ ........



374 U.S. 321, 363 {1963}; Heinz, 246 F.3d at 715)


981, 982 {D.C. Cir. 1990}; Heinz, 246 F.3d at 715)

• Additional evidence of harmful effects corroborates the presumption Not part of our burden


• Defendants bear the burden of rebutting the presumption "The more compelling the prima facie case, the more evidence the defendant must present to rebut it successfully" (Baker Hughes, 908 F.2d at 991; H&R Block, 833 F. Supp. 2d at 72)

8


~- Burden Shifting Framework ·· .. /.~ .. \:'.r:~!.';-.': ..•... ··



374 U.S. 321, 363 {1963}; Heinz, 246 F.3d at 715)


981, 982 {D.C. Cir. 1990}; Heinz, 246 F. 3d at 715)

• Additional evidence of harmful effects corroborates the presumption

Not part of our burden


• Defendants bear the burden of rebutting the presumption - "The more compelling the prima facie case, the more evidence the defendant must

present to rebut it successfully" (Baker Hughes, 908 F.2d at 991; H&R Block, 833 F. Supp. 2d at 72}

• Only if Defendants successfully rebut the presumption, Plaintiffs must prOdUCe additional evidence Of antiCOmpetitiVe effeCtS (Baker Hughes, 908 F.2d at

983; Heinz, 246 F.3d at 715)

9


10


• Section 7 prohibits mergers that substantially lessen competition "in any line of commerce or in any activity affecting commerce in any section of the country" (1s u.s.c. § 1s)

• The relevant market is the line of commerce that would be SUbStantially leSSened by the merger (Phi/a. Nat'/ Bank 374, U.S. at 355; Brown

Shoe, 3 70 U.S. at 325)

• "The Agencies may evaluate a merger in any relevant market satisfying the [hypothetical monopolist] test, guided by the overarching principle that the purpose of defining the market and measuring market shares is to illuminate the evaluation Of COmpetitiVe effeCtS" (Horizontal Merger Guidelines§ 4.1.1)

11


~- Product Market: Cluster Markets

• Courts find product markets consisting of clusters of products - Sale of consumable office supplies through office supply

SUperStOreS (Staples, 970 F. Supp. at 1074-79)

Inpatient generate acute care services sold to commercial health plans (ProMedica, 749 F.3d at 565-68; OSF Healthcare (Rockford II}, 852 F. Supp. 2d 1075-76}

• Different products appropriately included in a cluster market When COmpetitiOn COnditiOnS are Similar (ProMedica, 749 F.3d at 565-68)

12


~,·] Pro_duct Ma~ket Properly L~mi~ed to Cluster of Consumable \~ Off1ce Supplies Sold and D1str1buted to Large Customers

• Consumable office supplies are subject to similar competitive conditions

• Cluster includes paper - Most cut sheet paper sold and distributed to large customers by

Staples and Office Depot • Customers want desktop delivery of cut sheet paper

- Fifth Third Bank Hrg. Tr.at 985-86; Select Medical Hrg. Tr. at 1083-85

• Manufacturers do not have the national distribution network necessary to meet day-to-day needs

- PX02122 (Bank of America Dep. Tr.) at 089-90

• Customers may leverage discounts from manufacturers but purchase from Staples and Office Depot

- PX02122 (Bank of America Dep. Tr.) at 090

- Specialty paper sold directly by manufacturers, excluded from market

• Fifth Third Bank Hrg. Tr. at 934-36; PX02122 (Bank of America Dep. Tr.) at 088 ("the reason we're going to these other vendors is because they've got a specific type of paper that they manufacture that others don't." )

13


•

•

•

•

•

•

AEP: 111 think we have around 52 contracts [for jan/san products] . For jan/san, most if not all of those cont racts are not only product but it's also service, so - it's a bundled package" (Hrg. Tr. at 329). AEP " literally [has] hundreds of cont racts" fo r technology (Hrg. Tr. at 352)

McDonald's: Works wit h a number of suppliers for jan/ san (Hrg. Tr. at 424). McDonald's doesn't use Office Depot for jan/san or technology products (Hrg. Tr. at 358)

Fifth Third Bank: Has a company, Viox, that provides faci lity management across it s locations, and that includes provid ing janitorial supplies (See Hrg. Tr. at 944)

Best Buy: Affi rmed t hat " there are a number of alternatives in the marketplace" for cleaning and break room (Hrg. Tr. at 1317)

WB Mason: There are a number of compet itors that can supply jan/ san, breakroom, furn iture, technology products, but only Staples and Office Depot can serve " large customers with $500,000 a year or more in spend who have a nationwide footprint" for consumable office supplies. (Hrg. Tr. at 1601-04, 1609)

HealthTrust: HealthTrust has separate contracts in place wit h vendors other than Staples or Office Depot for janitoria l products and furn iture. These ot her vendors could not replace Staples as Healt hTrust's office supply vendor (Hrg. Tr. at 1906-09)

And about how much did Select Medical spend on jan/san

pr~s with Office Depot In 2014?

A. I bellew It was a little owr 400,000 annually.

Q . And does Select Medical buy Jan/san products from any

other vendor?

A. We do. We purdlase •orne products from Grainger as - ll

Q . And has Grainger ever solicited Select Medical's general

omce supjllles or copy paper business?

A. They haw not.

Q . Lers turn 10 toclvlology products. What type of

technology products do you - does Select Medical buy from

Office Depot?

A. We do 110( buy vary much . There might be soma

1022

accessoriel, such aa a mouse, or a keyboard, or something of

that natun. So wa would 110( utilize them for our larger spend

of computers.

4 Q . And does Select Medical pun:hase technology produds from

5 other companies?

6 A. Wado.

7 Q . And do you have conlnlcts with these other companies thai

8 seliiOchnology products?

Yes, - haw contacts with companies such as Dell, SHI,

cow. Q . And so Selec1 Medk:al purchases technology products from

a vanety ()(suppliers; is that right?

A. Con-eel

Q . And has Dell, or COW, or SHI ever solicited Select

Medical's general office suppUes bUsiness?

A. They haw not.

Q . And have any of those oompanies ever solicited Se4ect

Medical's copy paper bUsiness?

A. They have not.

'eve 10J 1 &o 1N4 rtl UIP


({.)! Ink a~~ Toner A~e Subject to Different Competitive '-~~~/ Cond1t1ons, Not 1n Relevant Market

• In recent years, sales of ink and toner for Large Business Customers have shifted to sales of Managed Print Services from manufacturers and specialty MPS vendors that do not offer office supplies

HealthTrust: Has relationships with Xerox and Konica Minolta and neither has "approached HealthTrust to try to be [its] primary vendor" (Hrg. Tr. at 1925)

AEP: Has a contract with Xerox to cover multifunctional devices for ink and toner (Hrg. Tr. at 333-34)

McDonald's: Affirming " The set of companies that are capable of providing ink and toner to McDonald's is broader, instead of companies that provide office supplies" (Hrg. Tr. at 503)

Select Medical: Purchases ink and toner from Total Print, but does not "consider Total Print to be a viable alternative supplier of copy paper or general office supplies (Hrg. Tr. at 1018-21)

Best Buy: Affirming there are a number of alternatives that Best Buy can seek for ink and toner in addition to Staples and Office Depot, such as MPS vendors (Hrg. Tr. at 1317-18)

Q.

rruch toner because they picked up an MPS arrangement'i1

A. Oh, we've had a number of them over the years.

Q. And in your experience do MPS providers like Xerox and HP

win RFPs and contracts to provide these services for large

customers?

A . Yes, they do.

Q . And do these MPS n rmJJI'IArn ies

d do these MPS roviders also P-rovide office su lies

ike Post-it notes and paper clips?

A. No. iThere are other office supply companies that, like

us, try to do this stuff. ....... .._.,. .. .. ..-

' Q, w... .... _., .. _ • A. 111els•~._..~_, .. ._,__. ..................... ,......,_., ......... ..... A ....... ..,o.n • .-;..,-.a ..... ll...,-naf .. Q ........ ~ ...... .., ... _..,_ .. .._. ..

c ......_ ............ .......................... . ..... ~ 11 Q. C:...., """'WI'f(U' ..... fiCe.c:tl~ .. ~' Rf'Pa...darirac:t..,~larnlu.for!.gl~

WB Mason Hrg. Tr. at 1604-07


I •. , ' .. ,-. " ' ' I t ·!· -~ ·• ~ '• i ;- '. , , I , . '.. r ~ , - ' .. ' ' : I I (' 0 .. ) /, . 'r .· ( J I I ~- I . ' , .· ~-u ,(..~ t:_]-·_:- , .. -~,..;-:J(_)II - ..... :' _,._._,1""-: ~~l- 1 (:t..._..1_:_,i't;J / ._:c.•• .' ·~\: ~-- --·. , 1 1~\. --._-...,

-·,- • \ ' .! u '. .-< •, '1 ,- i j.·:.· '· :· 1 .. ~ ;::. r: =-~ .. ,-.. .-·I • ' ' • '·- -~I 't r (j I r' I ~I ' ,·~ ;:,~ (-.:_ :_:, I .... ,. I :. •) ., -, c. Stmpa-on • • • • ·.- 1 , "· r .. ... , -. ,,... t • ... ~"" , -../ . ~ ._ J , , ... ._, ' • ... •• 1 • ••• r ; , ~ • ~ ·..._~ l , ~._ • •• (I <. ~ • : .I 1 1 l :(··

_,~ _ ..

• Major MPS programs for large customers include:

LEXM+~

xerox

RICOH imagint:o change.

SPLS & ODP Presentation · ~o · the FTC, July 14, 2015 -·

HP's printing business, which includes MPS, genernted S23.0 bUiion in 2014; global MPS business grew by double digits in 2013; more than 3,100 MPS customers globally1

MPS segment grew 16% in '14 and 22% in '13; renewal rate for MPS customers was 95% Pf14 and 100% FY ' 13; 23 MPS contrncls with companies listed on Fortune 5002

MPS program generated S3.8 billion globally ln 2013 and grew by 7%; Xerox has more than 1,000 MPS customersl

MPS program grew 14% in 2013; Ricoh has more lhan 4,000 MPS customers globalJy4

. - - - '

, 'Examples of litU]e Custom~rs 1

Delta Airtines, Direc1V, Keybank., L'Oreal, Merck, The Walt Disney Company

Associated Bank, Columbia Sportswear, Cox Enterprises, The Home Depot, MarnSource Bank, Synovus, Union Bank, United states Department of Agriculture. Unum Group

BlackrockFinancial Management, Groche America, Honeywell, Ingersoll Rand, Leidos, National Grid, Prudential Insurance, Reuters, Schenker Inc., Science App!icalfons Inti Corp (SAJC), United Technologies Corporation (UTC)

ADP, Inc., Albert Einstein Medical Center, Apollo Group, Kaplan, Kroger, MasterCard, Sempra Energy, state street Bank & Trust, US Communities Government Purchasing Alliance

Plirit Services Lanascape {HP Excerpt~ June 2014, at 15, 21; (2) lem1ark lntanationa. Marbdine. Feb. 2015. at 23; ) Ouocirea, M;anaged Print Service~ Landscap< {Xerox Ex.::erpt), J\lne 2014, at 20; (4) Ouocirca. Managed Pmt ). June 20 14. a1 13. HlGHl. Y CONFIDENTIAL 16


(IJ Product Market Red Herrings

• Defendants assert that consumable office supplies are commodities; not 11mission critical"

Antitrust cases have involved markets for entirely discretionary products like beer, tobacco, and pies. See, e.g.:

• Swedish Match, 131 F. Supp. 2d at 158 (smokeless tobacco)

• Mrs. Smith's Pie Co., 440 F. Supp. 220, 229 (E.D. Pa. 1976} (frozen dessert pies)

• Defendants express doubt that the largest companies in the U.S. can be harmed

Courts frequently grant injunctions in 11Upstream" markets {where direct customer is a corporation), removed from the ultimate consumers. See, e.g.:

• CCC Holdings, 605 F. Supp. 2d at 38-39 (estimatics products sold to insurance companies and auto repair shops)

• Bazaarvoice, 2014 WL 203966 at 1-2, 22 (N.D.Ca 2014} (ratings & review platforms used by online retailers)

• Libbey, 211 F. Supp. 2d at 38, 50-51, 55 (D.O. C. 2002} (foodservice glassware)

17


Consumable Office Supplies Market Shares

Source: Exhibit R lB, Shapiro Reply Rep01t.

Fortune 100 Customers, 2014

Georgia Pacific, 1.6%

mtar, 0.8%

l:-......Lindenmeyr, 0.5°/o

All Other Supplier s, 1 0.6°/o W.B. M ason, 0.2 °/o

Unreported Leakage

Adjustment, 2.2°/o

18


Measure

Pre-Merger: Staples Share Office Depot Share HHI

Post-Merger: Staples & Office Depot Share HHI Increase in HHI

Value

47% 32% 3,274

19


RELEVANT MARKET IS THE SALE AND DISTRIBUTION OF CONSUMABLE OFFICE SUPPLIES TO LARGE BUSINESS

CUSTOMERS

PRESUMPTION ESTABLISHED


21


~t'Jil;,:' ij~ Evi~ence Shows Likely Anticompetitive Harm From -~ Un1lateral Effects

·· ...• ~ .. \:'.r:~!.';-.': ..•... ··

HORIZONTAL ME GUIDELINES

In a bidding market, effects "are likely in proportion to the frequency or probability with which, prior to the merger, one of the merging sellers had been the runner-up when the other won the business. These effects also are likely to be greater,

••••••••••••• the greater advantage the runner-up merging firm has over other suppliers in meeting customers' needs."

Horizontal Merger Guidelines (2010) § 6.2

U.S. 0EPARTVI(NT Of' ftJ'>TIC(

AND TH~

I [ OfRAL TRAm (OMMI~'IION

IS\UI D; AUGU'il I 9, 20 I()

22


&~(~~l'':'ij~,: Effects Are Likely to Be Significant Because Staples and Office \~~~:; Depot Are Each Other's Closest Competitors in Bidding Market

Staples and Office Depot Dominate in Fortune 100 RFP Data with 50 Wins Out of 52

30

20

Staples Office Depot

Note: Based on most recent event at each Fortune 100 customer, 2012-2015. Source: Exhibit R 7 A, Shapiro Reply Report.

N=52

1 1

Runco XPEDX I Veritiv

23


~,.,;,:'ij1): Effects Are Likely to Be Significant Beca~se S~apl~s ~nd Office ·-~~/ Depot Are Each Other's Closest Competitors 1n B1dd1ng Market

.... : .. _ , , ..... .

Staples Dominates in Office Depot's Win-Loss Data with 240 Wins

240

18

• 11 - 3

2013-2015, (N = 1253}

3 3 2 2 2 2 2

G ~ ~ ~ ~ ~ ~ ".S~ ~~~ oDv Orf$' ~~:~- '?§' ()'-~

~"<§' ~<> ~~ '& C:3 ~-.,o ~ ').. C;~ ,;::;.~ ~ C;~ ~

-~~'V 0~ ~;<. ~ ~ ~0 ~<>" ~ c? ~o ~o

-~ 0~ G~~ ~c;

;§ Note: Competitors listed have at least 2 wins. In total, 40 competitors are mentioned. (5 Source: Exhibit 10, Shapiro Report.

2 2

24


~,.,;,:'ij1): Effects Are Likely to Be Significant Beca~se S~apl~s ~nd Office ·-~~/ Depot Are Each Other's Closest Competitors 1n B1dd1ng Market

.... : .. _ , , ..... .

Office Depot Dominates in Staples Win-Loss Data with 142 Wins 2012-2014 (N = 393)

142

20

4 3 2

Note: Competitors listed have at least 2 wins. In total, 27 competitors are mentioned. Source: Exhibit 11 , Shapiro Report.

2 2 2 2

25


{!'riJil'':'ij~i; Offic~ Depot and Office_Max Represented to the FTC That Staples -~~· Was 1ts Closest Competitor

Office Max Losses Prior to Merger with Office Depot in Office Depot Presentation to FTC, 2013 Opportunities for >$150K and >$1M 828 Accounts, 2008-2013

OMX Hunter s B2B Accounts Over $150,000

(n = 273)

OMX Hunters B2B Accounts Over $1,000,000

(n = 65)

Source: Office Depot OfficeMax Presentation to FfC on Competition for Contract Sales to Large and National Customers, September 13, 2013, pp. 18, 21.

26


~'-\) Offic~ Depot and Office_Max Represented to the FTC that Staples ·-~~~/ Was 1ts Closest Competitor

Office Depot Losses Prior to Merger with Office Max in Office Depot Presentation to FTC, 2013 Opportunities for >$150K and >$1M 828 Accounts, 2007-2013

ODP Bid History B2BAccounts Over $1,000,000

Other Suppliers,

22%

(n = 9)

ODP Bid History B2B Accounts Over $150,000

(n = 37)

ODP Win/Loss/Renew B2B Accounts Over $1,000,000

Other (n = 109)

OfficeMaxy 28%

ODP Win/Loss/Renew B2B Accounts Over $150,000

Other (n = 375)

O fficeMax, j 25%

Source: Office Depot OfficeMax Presentation to FTC on Competition for Contract Sales to Large and National Customers, September 13, 2013, pp. 18, 21. 27


1 lhelr business Is outside of Masonville?

2 A. No. ---3 Q. And what companies can serve large customers with

1601

4 $500,000 a year or more In spend who have a nationwide footprint

5 for, you know, pens, and file folders, and Post-It notes, and

3 Q. And what companies can serve large customers with

4 $500,000 a year or more in spend who have a nationwide footprint

5 for, you know, pens, and file folders, and Post-it notes, and

6 that sort of thing?

7 A. So In my opinion there are two people who can do that:

8 That would be Staples and Office Depot.

22 lYe towns the competition ch.ngea to somebody ..... wheNuln

2 3 afftce supplies n atays preay much the ume whe,.,., you go.

2 4 Q. And what do you mean It stays the same wherever you go?

Hrg. Tr. at 1601 28


/~-~:~::::~·;~·:;~~, Competition Between Staples and Office Depot \~~! Tangibly Benefits Large Business Customers

FIFTH THIRD BANK

Fifth Third Bank RFP Evaluation PX07159-001 29


~-); Com~etition B~tween Stap~es and Office Depot ~/ Tang1bly Benef1ts Large Busmess Customers

~AMERICAN® 1iiJi1 ELEC1RIC

A. Pretty much we felt there was only two players that can

meet our needs, Office Depot and Staples and those are the

two that were part of the sourcing event process.

Q. So I think we just mentioned it, but in what ways has AEA

benefited from the comQetition between Sta es and Office De ot?

A. Primarily, financially. So our sourcing event process,

we're driving for the best value, the best cost; and that's what

we got as a result of that competition.

Hrg. Tr. at 224, 341 30


AEP: Outcome of 2015 RFP Process: Savings

Reduction fr~om RFQ process ~======= I===~

Reduction fr,om Demand Process

Increased savi s from Rebate

fixed Price for 3

10% off atl orders for 90 days

Savings

Total Savings far Offic~ Supplies & Paper

"The final step was to conduct a demand negotiation or counter-proposal with Staples and Office Depot. The main issue with Staples was-what the team believed to bedeceptive pricing tactics used in the RFQ. Staples refused to accept this point. In the end, the incumbent supplier (OfficeMax, which was acquired by Office Depot) came in with a better cost profile and agreed to more of our demand points."

Source: AEP, PX07366

31


~t\lil;,:'ij~ Large Business Customers Are Concerned About the -~ Proposed Merger

1 9 Q. Mr. Cervone, al'9 you concemed about the proposed merger

2 o between Office Depot and Staples?

21 A. Yes, I am.

2 2 Q. Wny is that?

2 3 A. Because It removes one of the closest competitors to the

2 4 other.

2 5 Q. And do you believe thafs going to affect McDonald's?

1 A. I do. I believe that when you take all competition out

2 of the marketplace In this 4;a88, I believe that it -- It would

3 lllkely have a negative effect on the customers.

4 Q. What sort of negative effect do you think it will have on

customers?

A. Well, I would imagine upward pressure on pricing,

potentially decreased options in tenns of product offerings.

378

Hrg. Tr. at .377-78 32


~t'Jil;,:'ij~ Large Business Customers Are Concerned About the \~ Proposed Merger

I •I AI {tJif!Rill£1

THE WITNESS: You know, having been in procurement for

quite some time, whenever there's a consolidation in the

marketplace, it throws up a lot of red flags. Because my life's 10 delivery, feel we'Ve been lrea18d vfKY fairly. But now all of a

1 ~ lf~'{liQOinalt'tiJ._C)IOil'I8(II!Y.~"'"thi!JIC!Qn,

And then, you know, on a financial standpoint, if they

become the only capable supplier for our business model, then I

get concerned that they really don't have to service us well , and

they really don't have to be as competitive as they were if

indeed they are the only company left that can service somebody

of our size and footprint.

FIFTH THIRD BANK

1 ... .. -T, •'- •f ~--- -""'~......_ ....

5 1m81'1Jing ClOf1'll)lrliee and -glng WtrfS ol going to market,

6 Including If we ~ 1o change things lntemaly to make SU'e

1 that we safeguard Fifth Third to maka aura Wfira getting lhe

6 right, you know, qually, and delivery, and cost.

Hrg. Tr. at 917-18 33


~-); Large Business Customers Are Concerned About the <~· Proposed Merger

Q. And I just want to follow up on the sequence of events

here.

So if I'm understanding correctly, you initially

approached Staples on its own to try to renegotiate the contract

before it expired later this year; is that right?

A. Correct.

Q . Okay. And they offered you some value, but then the

value was taken back? Do I understand that correctly?

A. Correct.

Q. Okay. And then Office Depot got involved in the bid

process?

A. Correct.

""" 9' Ulllla-ot_......_yw-.t,W..GWG ,~___,_ .,,..., .... fl4ft

you value?

A. Correct THE COURT: All right. So what happens if they merge?

THE WITNESS: Well, my belief is that if they merge we'll

be in the same situation that-- we'll be in a noncompetitive

environment. We will not have a competitive environment behind

which to negotiate with a nationally-capable contracted vendor.

Hrg. Tr. at 1898, 1901

HEALTHTRUST 34


{r8) Large Business Customers Are Concerned About the -~ Proposed Merger

\Nho does Select Medical consider to be its next best

option for general office supplies and copy paper?

A. The next best option would be considered to be Staples. 7 A. I do have concerns fiOiilSiiiefM&cii'Cil's perspective.

Large corporate organizations such as Select Medical, I believe

Q. And given the proposed merger between Staples and Office

Depot, do you have any concerns about that proposed merger?

• select ~JMEDICAL

Improving Quality of Life

ave concerns ca s perspe

Large corporate organizations such as Select Medical, I believe

it's Important to have that competition to be able to properly

servl ce our national footprint, our national presence, and to

also be able to provide the best possible pricing. Given buying

power and things of that nature to truly consolidate spend, I

would have concems If there was only one company.

Hrg. Tr. at 1018 35


Entry or Expansion Will Not Be Timely, Likely, or Sufficient

36


~- Entry _or Expansion Will Not Be Timely, Likely, or .~.:"(~,,: :. / Suff1c1ent

11According to the Merger Guidelines, entry or expansion must be 'timely, likely, and sufficient in its magnitude, character, and scope to deter or counteract the competitive effects of

Ill COnCern (H&R Block, 833 F. Supp. 2d at 73)

11Defendants bear the burden of demonstrating the ability of other distributors to 'fill the competitive void' that will result from the proposed merger" (sysco, 113 F. supp. 3d at so)

37


•

•

•

•

Timely: "[R]apid enough that customers are not significantly harmed by the merger, despite any anti competitive harm that OCCUrS priOr tO the entry" (Horizontal Merger Guidelines§ 9.1 )

Harm from merger will be immediate

Contracts come up for renewal

4 A. Well, usually this is a matter of how far out can we

5 look, given this market. We talked about this, I think,

6 early in my testimony. Really, fast enough so that

7 customers aren't harmed for any, you know, significant

8 period of time. And a year or two is a common timeframe.

Non-core item prices not 9 Go out a little further, perhaps, that's about it .

protected by contract ~ 0 Q. And does that mean that you only start to consider harm

Contracts allow Staples/Office ~1 a year or two out?

Depot to terminate at will ~ 2 A. No, no. Any hann that occurs, including day after the

~ 3 merger and the deal closes, that's harm to customers, we

~ 4 care about it. The question is whether, if the curative

~ 5 effects of the entry are fast enough, we basically -- I

Hrg. Tr. at 2403

38


~- Entry or Expansion Is Not Likely

Likely: Whether it would be profitable to enter the market after considering the assets, capabilities, capital needed, and risk aSSOCiated With entry (Horizonta/MergerGuidelines§9.2)

39 Hrg. Tr. at 1661, 1663


Sufficient: sufficient to deter or counteract the competitive harm (Horizontal Merger Guidelines § 9.3)

• Defendants "bear the burden of demonstrating the ability of other distributors to 1fill the competitive void' that will result from the proposed merger" (Sysco, 113 F. Supp. 3d at 80)

• Insufficient to simply identify other competitors that might possibly expand (H&R Block, 833 F. Supp. 2d at 73-76)

14 whether entry w~l~ be sufficient~ Giver~ the n1ag nitude of

15 the share-s and the bidding data we've seen, it's a pretty

CD A Charles River lY1.. Assocmes

high hurdle, in rny view, for entry to be sufficient. Amd so

40


~- Large ~usiness Customers Require a Vendor with an t~,l.'.: '··:~,,: ·),f Established and Proven Track Record

Q. And in terms of customer service, what are you looking for from an office supplies vendor?

A. Well, we're looking for, you know, a company that has a

demonstrated track record of providing on..(ime deliveries, you

know, that can quickly correct any deficiencies or any issues

that may pop up across the membership, and somebody that is

empowereO,has ffieautllonty o mal(e the issue go away.

Q. So thinking about all the service requirements that we've

talked about, all tile attributes that you look for in an office

supplies vendor, aside from competitive pricing, would you

consider an office supplies vendor to be a viable option for you

and your membership if it didn't offer all these services and

attributes?

• We woulan 't consiCiir it to tie Vla51e .

Hrg. Tr. at 1937-38

HEALTHTRUST 41


~;rii~:Amazon's ~haracteris~ics Tod~y Supports !~at Amazon's ·~~/ 11Entry" W1ll Not Be T1mely, L1kely, or Suff1c1ent

• Before the launch of Amazon Business, Amazon sold office supplies, and Amazon targeted business customers, first through smallparts.com and then through Amazon Supply (Hrg. Tr. at 522-26)

• Amazon Business is a B2B marketplace that is hosted on the Amazon.com website (/d. at 521:14-23)

• The marketplace allows third parties to sell products directly. Amazon does not control pricing, volumes or delivery terms of thirdparty sellers, which provide half of the products sold on Amazon Business (/d. at 540:17-541:4).

amaz ""', ,;'1

ply

42


• Currently, Amazon Business:

DOES NOT offer product curation, a feature that large businesses use to limit employees' choices of products (Hrg. Tr. at 529:5-531:5; 555:25-556:7)

DOES NOT offer desktop delivery (/d. 551:9-10)

DOES NOT allow for automatically recurring weekly deliveries (/d. at 648:23-649:11)

DOES NOT negotiate contracts with customers (/d. at 543:21-23)

DOES NOT serve as the primary vendor of office supplies to any large customer, and has not won an RFP to be the primary vendor of office supplies (/d. at 544:8-10; 551:11-13)

• Currently, Amazon Business participates in RFPs only in a limited way, often responding only to a request for a quote for a limited number of items {ld. at 546:18-547:12)



45


1408

So, it's a fantasy to think that somebody who has

never done Tier 1 before, has never dealt with the end user

before, has never dealt with large enterprise end usa s is

now going to, in 18 months, take at least 30 Office Depot .,_clone n.. 1 Wore, hM .,_ ct.tt with the end ww

_,_~,._ befoN. hM nevw ct.tt with .. roe ente'llfiM end ~ ••

It's an experiment at best. It is an experiment

that is almost designed to fail. It's hard enough doing

one. It's hard enough doing one when you've never done one, - ~ -· It' a hard enough doing -when you've ~Mver done-,

24 .. •lone trying to do :JO ... one& lo my ClOIICem ..... ly

25 lai'IICnon the I.,.,..,.... Tbel•lll+illkin Ia eo.......,_

PO Morrison Hrg. Tr. at 1408 46


47


• High market concentration levels require "proof of extraordinary efficiencies" (Heinz, 246 F.3d at 720-21)

• Defendants must establish that their claimed efficiencies are: • Merger-specific: "cost saving that could not be achieved

without the merger" (H&R Block, 833 F. supp. 2d at 89-90)

• Verifiable: • Requires method of factual analysis and documentation

that can be independently assessed (H&R Block, 833 F. supp. 2d at

91-92; Staples, 970 F. Supp. at 1089-90)

• Assertions about managerial judgments insufficient (H&R

Block, 833 F. Supp. 2d at 91-92)

• "Delayed benefits" difficult to predict and entitled to less

Weight {CCC Holdings, 605 F. Supp. 2d at 73 (quoting the Horizontal Merger

Guidelines))

48


2 THE WITNESS: So, just to set the stage where

3 we're at. lhe question in this part of efficiency analysis

4 is if Staples and Office Depot-- let's suppose they can buy

5 pens more cheaply because they're now even bigger, and

6 Mr. Anderson, their effidency expert, says they will be

7 able to do that. Will they charge Bank of America less for

8 pens? That's what we're asking one of our customer. And

9 this is absolutely addressed on page 52 of my first report.

1 0 TI1e -- what I'm saying -- I said generally some

11 costs get passed through, some costs they don't, just as a

12 general principle. Here I don't expect there to be much

13 pass through from what I've seen because Staples wil l -- the

14 reason to pass through the lower pen cost to Bank of America

15 is if they think they can sell more pens to Bank of America,

16 otherwise why? there's no good reason to do it.

17 One reason might be that they would fear that they

18 would lose Bank of America as a customer if they don't do

19 that. That seems much less of a concern after the merger

20 for the very reason we talked about.

21 Another would be maybe Bank of America will use

22 more pens if they give them a little bit lower price. And

23 again, the evidence -- there's no evidence that that sort

24 off elasticity or response is very significant here in

25 driving prices. So I don't think -- I'm not saying zero

• Defendants must also establish that their claimed efficiencies would benefit customers (st. Luke's

Health Sys., Ltd., 778 F.3d 775, 791-92 {9th Cir. 2015}, CCC

Holdings, 605 F. Supp. 2d at74 {D.O. C. 2009})

CD A Charles.R.iver l'C'\. Associates

I

Hrg. Tr. at 2451 49


so


• Staples: consumable office supplies, but excluding capital goods (computers, fax machines, and other business machines) and office furniture (97oF.supp.At1073-74)

• ProMedica: inpatient general acute care hospital services, but excluding inpatient tertiary services, inpatient obstetrics services, and outpatient

• SerVICeS (FTC v. ProMedica Health Sys./ 2011 WL 1219281/ *23-25 (N.D. Ohio Mar. 29/ 2011})

- ProMedica (6th Cir.) explicitly rejects Defendants' theory that all products/services sold under contract define a product market (749 F.3d at 567)

51


• 11The FTC need not present market shares and HHI estimates with the precision of a NASA scientist." (syscoi 113 F. Supp. 3d at 54)

• 11A reliable, reasonable, close approximation of relevant market share data is sufficient, however." (H& R Block, Inc., 833 F. supp. 2d 36, 72 (D. D.C. 2011))

• 11The market shares, computed by the Commission largely from statistics provided by PPG, are concededly imprecise. Nevertheless, although PPG and Swedlow 'may point to technical flaws in the compilation of these statistics, ... in cases of this type precision in detail is less important than the accuracy of the broad picture presented.'" (FTc v. PPG Indus., 628 F. Supp. 881, 884 n.6 (D. D. C. 1986} (quoting Brown Shoe, 370 U.S. at 342 n.69})

52


• 11The market share which companies may control by merging is one of the most important factors to be considered when determining the probable effects of the combination on effective competition in the relevant market" (Brown Shoe, 370 U.S. at 343)

• 11[Market share and concentration] statistics provide a graphic picture of the immediate impact of a merger, and, as such, also provide a meaningful base upon which to build conclusions of the probable fUtUre effeCtS Of the merger" (Brown Shoe, 370 U.S. at 342 n.70 {1962}).

• A 11merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market, is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely tO haVe SUCh antiCOmpetitiVe effeCtS." {Phi/a. Nat'/ Bank, 374 U.S. at 363)

53


f. Relevant Geographic Market Is the United States

• The geographic market is "where, within the area of competitive overlap, the effect of the merger on competition Will be direct and immediate" (Sysco, 113 F. Supp. at48 {quoting Phi/a. Nat'/ Bank, 374 U.S.

at 357}).

)- Staples and Office Depot compete nationally for large customers

• Geographic market can be defined using hypothetical monopolist test. (Horizontal Merger Guidelines § 4.2) )- Hypothetical monopolist of consumable office supplies sold to large

customers could profitably impose a SSNIP

)- Large customers would not defeat a SSNIP by switching to foreign vendors of consumable office supplies

54


~- Proposed 11Fix" Is Inadequate

• "Restoring competition requires replacing the competitive intensity lost as a result of the merger rather than focusing narrowly on returning to premerger HHI levels" (Sysco, 113 F. Supp. 3d at 72-73 (quoting DOJ Remedies Guidelines))

• Competition must be restored "on day one" (sysco, 113 F. supp. 3d at 76)

"If you're not properly partnered, in my case years ago, and geared for dealing with these large corporations, an independently owned office product company cannot engage with these large corporate entities due to everything that they ask for in their contractual relationships" (Po Morrison Hrg. Tr. at 1385)

"Essendant cannot fill the shoes of an Office Depot any time soon" (Po Morrision

Hrg. Tr. 1395)

• Essendant cannot compete on price to Tier 1 customers (Po Morrison Hrg. Tr. at

1413, 1387-88)

• Essendant does not have experience dealing directly with large corporate CUStomers (PO Morrison Hrg. Tr. at 1395)

• Essendant does not have the services, such as an e-commerce platform or relationship engagement, necessary to serve large customers (Po Morrison

Hrg. Tr. at 1395-96)

55


~- Behavioral Remedies Rare, Strongly Disfavored ·· .. /.~ .. \:'.r:~!.';-.': ..•... ··

• Divestiture is the usual, proper remedy (United States v. E. I. du Pont de Nemours & Co.~ 366 U.S. 31 6~ 329-30 {1961}; Polypore lnt'l~ Inc.~ No. 9327~ 2010 WL 9933413~ at *32 {FTC Dec. 13~ 2010})

• 11The very words of§ 7 suggest that an undoing of the aCqUiSitiOn iS a natural remedy." ( £./.du Pont~ 366 U.S. at 329-30}

• 11[C]omplete divestiture provides the greatest likelihood that the asset package will restore competition and be SUffiCiently Viable" tO attraCt a buyer (Polypore lnt'l~ Inc.~ No. 9327~ 2010 WL 9933413~ at *32 (FTC Dec. 13~ 2010})

• A remedy is 11more likely to restore competition if the firms that engaged in premerger competition are not under

h• II COmmon OWnerS lp (In re Evanston Northwestern Healthcare Corp.~ 2007 FTC LEXIS 210~ *245 (FTC Aug. 6~ 2007})

• 11Even remedies which 'entail harsh consequences' would be appropriate to ameliorate the harm to competition from an antitrUSt ViOlatiOn .11

(FTC v. Whole Foods Mkt.~ Inc.~ 548 F. 3d 1028~ 1033 (D.C. Cir. 2008} (quoting United States v. E. I. duPont de Nemours & Co.~ 366 U.S. 316~ 327~ {1961})

56

Documents

FTC, et al. v. Staples, Inc., et al. · Case 1:15-cv-02115-EGS Document 369 Filed 04/11/16 Page 1 of 56 FTC, et al. v. Staples, Inc., et al. Summation April 5, 2016 1